Capital Concern


Cablevision Systems Corp. suffered a stock shock late last week after it hinted that it would proceed with forays into wireless telephony and direct-broadcast satellite service, countering Wall Street expectations that it would sell those assets to cover a looming funding shortfall.

In an earnings conference call with analysts last Thursday, vice chairman William Bell said Cablevision might have to seek funding in 2003, possibly through the sale of assets, debt securities or equity.

Bell also said a stock sale was probably not in the cards.

"It should be noted that the sale of equity is something the Dolan family [Cablevision's controlling shareholders] has been and continues to be loathe to do," he said. "The company has never issued equity since the company went public back in 1986."

Cablevision would weigh its options over the next several months, Bell added.

The news sent Cablevision's stock into a tailspin. The stock closed Feb. 14 at $36, down $3.06 (7.8 percent), after sinking as low as $35.25 earlier that day. The stock was up 10 cents, to $36.10, in early trading on Feb. 15.

Cablevision's fourth-quarter results didn't help matters. Revenue rose 6 percent but cash flow declined 3 percent, primarily because of continued losses at its The Wiz electronics retail stores, declining attendance for holiday events at Radio City Music Hall and Madison Square Garden and expenses related to rolling out its new iO: Interactive Optimum advanced digital-cable platform.

At the cable operations, revenue rose 9 percent in the period, to $539.1 million, and adjusted operating cash flow rose 12 percent, to $220.2 million, in line with previous guidance.

Basic-subscriber growth was 1.6 percent, to 3 million customers, mainly due to New York-area residents that signed on for cable service after over-the-air broadcast service was knocked out on Sept. 11.

Cablevision added 101,000 revenue-generating units in the quarter: 84,000 high-speed data customers and 17,200 digital cable customers. The MSO said it would meet its target of 125,000 to 150,000 digital subscribers by the end of 2002, but most of that growth would come in the second half of the year.


The revelation that Cablevision would need to seek additional funding to meet capital requirements seemed to justify the fears of Goldman Sachs & Co. cable analyst Rich Greenfield, who downgraded the stock to "market perform" from "market outperform" on Feb. 13, citing funding concerns.

Moody's Investors Services also downgraded its rating on Cablevision unsecured debt one notch from Ba2 to Ba1, its senior subordinated notes to Ba3 from Ba2, preferred stock to B1 from Ba3 and changed its ratings outlook to stable.

Greenfield wrote of growing concerns over the capital needed to support Cablevision's DBS plans, and its plans to offer wireless telephone service via "personal communications service" wireless licenses.

When Cablevision announced revised guidance in January, the company said it would spend about $145 million on the DBS venture and $75 million on PCS in 2002.

Although Cablevision had reduced its capital expenditure forecast for 2002 to $1.3 billion from between $1.5 billion and $1.7 billion, Greenfield wrote that he was still skeptical that the company would be able to fund its growth through internal cash flow and existing bank lines.

Cablevision CEO James Dolan said the MSO already has built out its PCS license in Ohio — it has 50,000 PCS subscribers in Cleveland — and that it plans to use its metro New York PCS licenses in tandem with its digital-cable service.

"We do think that the application of having a wireless component to our digital offering could become very valuable," Dolan said. "We intend to continue to operate in Ohio and we will be building in New York this year."

Dolan added that Cablevision is going forward with its DBS plans — a 50-50 partnership with Loral Space and Communications Ltd. — and is building a "state-of-the-art" satellite for the service.

But Dolan, perhaps sensing the uneasiness over the investment a satellite service would require, tempered his comments on the analyst call.

"We think that that technology is valuable," Dolan said. "We understand it is a significant investment over not just this year, but over the next couple of years. Our intention is not to let our investment in satellite or in PCS in any way have a negative impact on our core strategy in New York."

But that didn't appear to convince investors, who had been expecting those sales to help finance an estimated $2 billion free cash-flow shortfall over the next two years.

"The stock is down because Cablevision management talked about DBS and PCS investments in a positive sense," Bear Stearns & Co. cable analyst Ray Katz said. "The issue is not the funding shortfall — that's been around for months. Management indicated with its body language that it would not be selling DBS and PCS to raise the money."